Tracking the Issues: The U.S. Corporate Tax Rate Conundrum

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While U.S. presidential candidates on both sides call for lower corporate tax rates, the United States is expected to have the highest corporate tax rate among the world’s developed countries starting April 1 when Japan revises its tax code. Britain, meanwhile, plans to cut the country’s corporation tax on company profits to 24 percent from 26 percent in April and to 22 percent by 2014 (APF), all lower than originally planned.

Former Clinton adviser Laura D’Andrea Tyson writes in the New York Times that corporate tax reform is emerging as an major election issue in 2012 because of international economic problems, an astronomically high U.S. corporate tax rate, and dueling plans from both parties to change it. “As a result of globalization and technological change, corporate decisions about where to place investments are responsive to national differences in taxes and have become more sensitive over time,” Tyson writes. “The high corporate tax rate in the United States encourages American companies to invest in production in foreign countries and discourages foreign companies from investing in production in the United States.”

President Obama has proposed cutting the federal corporate tax rate to 28 percent from the current 35 percent, but that is still well above many developed and developing nations. He has also proposed closing many loopholes, which some analysts say are inefficient and unfair, since it plays favorites with certain industries.

“Those tax breaks, more generous than those in many nations, reduce corporate tax burdens significantly,” writes Obama adviser and Brookings Institution fellow Donald B. Marron writes in the Christian Science Monitor. He goes on to say: “Leveling the playing field (while maintaining revenues) will require that some companies pay more so others can pay less. Politicians would rather focus on potential winners, not losers. But losers there will be.”

The American Enterprise Institute’s Kevin Hassett and Romney adviser Glenn Hubbard, in a Wall Stret Journal op-ed, argue that focusing only on corporate taxes misses the point of what’s happening in business globally. They disagree with Obama’s plan to tax the individual income tax rates of the wealthy, which they argue could effect as much as 44 percent of U.S. business taxes. They also disagree with Rick Santorum to provide special tax breaks to manufacturers, which they say would be economically distorting.

Under Santorum’s plan most companies would pay a 17 percent tax, except for manufacturers, which would pay nothing. Newt Gingrich’s plan would take the United States from one of the highest corporate tax rates in the world to one of the lowest — 12.5 percent (CNN).

Minneapolis Star-Tribune columnist Eric Wieffering writes that while taxes are too high, companies may not want to give up other tax credits and loopholes in exchange for a lower rate. “Taxes aren’t the only factors companies consider when making location decisions, but in a global economy a country can’t afford to be known as the most expensive landlord,” he says.

This CFR Analysis Brief looks at the U.S. corporate tax rate int he context of the fiscal 2013 budget.

– Gayle S. Putrich, Contributing Editor

Opinions expressed on CFR blogs are solely those of the author or commenter, not of CFR, which takes no institutional positions.

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The Candidates and the World provides a timely guide to the national security and foreign policy dimensions of the 2012 presidential transition. It offers insight on the top issues, and gauges global reaction to the election's results.